Tax saving tools provided to citizens reduce the government’s revenues, but in return enable the citizen to compensate for what most governments of developed countries provide in terms of social security and medical care. Another benefit of tax deductions is that the citizen can directly contribute to economically beneficial investments, with a discount built-in from the lowering of the tax.
For the current financial year (2016-17), known in tax parlance as ‘previous year’, there are investments as well as expenses that are worth considering and acting on. Here is our list of our favourite investment instruments to save tax.
PPF & EPF: Most employees enjoy access to employees provident fund (EPF) and contributions are made by deduction from salary. An increased contribution can be made voluntarily. PPF is the safest investment available to an Indian resident, being guaranteed by the central government. The provident fund returns are not fixed, but are likely to remain above bank deposit rates. The term is 15 years plus the year in which the account was opened. The account can be extended indefinitely, but for 5 years at a time. Investments are entitled to a deduction under section 80C to maximum of Rs 150,000, returns and maturity proceeds are also tax-free, though EPF redemption within 5 years of the last deposit is taxed except at retirement.
ELSS funds: The equity-linked saving schemes (ELSS) of mutual funds have a low lock-in of 3 years. Investments benefit directly from economic expansion, which is reflected in stock prices. ELSS is offered by mutual funds and is transparent and well regulated. The growth option is preferred as returns and redemption proceeds are tax-free under existing tax laws.
Insurance premium: The life insurance premium paid for taxpayer, spouse and children is deductible if the premium is less than 10 per cent of the sum assured.
ULIPs: The unit-linked insurance products (ULIPs) provide a wide range of investment mixes, allowing for tailoring the portfolio for the ideal customer risk profile. Deduction is available only if the premium paid is not above 10 per cent of the sum assured and the premium is paid for at least two years.
SCSS: The senior citizens’ savings scheme (SCSS) is a pure debt investment for those above 60 years. Access is extended to those above 55 who have retired on superannuation or under the voluntary retirement scheme (VRS) and open the account within one month of retirement, the deposit amount not exceeding the amount of retirement benefits. The maximum deposit amount is Rs 15 lakh. Interest, currently at 8.5 per cent, is taxable, and is paid quarterly.
Bank fixed deposit: It provides tax deduction under section 80C and has a 5-year maturity and normally a lower interest rate than normal fixed deposits. Interest earned is taxable.
NPS: The national pension scheme (NPS) is a wonderful way to save tax and provide security for retirement. This attractive investment for tax-saving got a boost a couple of years ago with a separate and dedicated additional deduction of Rs 50,000 under section 80C, thus allowing for a total investment of Rs 2 lakh a year. The last budget provided for 40 per cent of the accumulated corpus to be redeemed tax-free at maturity on retirement at age 60. The chairman of the pension fund regulatory and development authority (PFRDA) has appealed to the government to provide EEE status to NPS. If approved, NPS would continue to provide a tax deduction on investment along with tax-free income and redemption.
NSS: Investments in the national savings certificates (NSS) are eligible investments. These have a 5-year lock-in period. The interest, compounded annually, is taxable. The interest for the year may be calculated and considered as reinvestment in that year and claimed as deduction under section 80C.
SSY: The sukanya samriddhi yojana (SSY) is deposits made for a girl child up to the age of 10, by the parents or guardian. It is limited to two daughters. The interest is compounded annually and is fully exempt from tax. The receipts upon maturity are also tax-free. The sukanya samriddhi yojana account matures 14 years after opening the account. A partial withdrawal of up to 50 per cent of the previous year’s balance is allowed after the account holder turns 18, the rest at 21. The last interest rate annou­nced on these deposits is 8.1 per cent.
In addition to investments that provide for deductions from taxable income of up to Rs 1.5 lakh under section 80C, with an additional Rs 50,000 in NPS under section 80CCD, there are investments and expenses that provide tax breaks. The deductions are part of the cumulative Rs 1.5 lakh permitted under section 80C.
Home loan: The repayment of principal portion of home loan is a permitted deduction. This is miniscule in the early years of servicing the mortgage, increasing, even ballooning towards the end of the repayment. Stamp duty, registration fees and transfer expenses are also eligible for deduction. An important additional deduction is on the interest paid on the mortgage, which is up to Rs 2 lakh a year, under section 24. An additional deduction of Rs 50,000 interest paid is provided (section 80EE) under certain conditions such as the loan of not over Rs 35 lakh should have been taken in 2016-17 for a property costing less than Rs 50 lakh.
Education fees: The payment of tuition fees for school, college, or educational institutes in India, for two minor children is deductible. Fees other than basic tuition fees for a full-time course do not qualify deduction.
To summarise, the popular deductions available on investments are a cumulative Rs 1.5 lakh for investment in PF, ELSS, insurance and ULIP, SCSS, specified bank fixed deposits, NSCs, SSY, repayment of principal of home loan, tuition fees and NPS. An additional Rs 50,000 deduction is available for NPS. Interest paid on home loan gets a deduction of Rs 2 lakh (Rs 2.5 lakh under certain conditions).